Missing the woods for the trees.Dr Rajiv Kumar

Food Subsidy Bill
 
Missing the woods for the trees
Cost will be double govt estimate and, due to leakages, states will end up paying open-ended food allowance

Food deprivation and malnutrition are completely unacceptable and everything has to be done to eliminate such evils. The prevalence of malnutrition in a country like India is, in itself, a cause for serious concern since malnourished children may jeopardise India’s favourable demographic dividend (as per independent estimates, close to 60% of India’s population is in the age group of 15-59 years). However, the question is whether we can afford to have a Food Subsidy Bill (FSB) and if such an endeavour is economically sustainable. This article tries to argue that the fiscal viability of the proposed FSB is not clear and the delivery outcomes could be highly compromised, given the governance weaknesses and ineffective delivery mechanisms in place.

We understand that currently there are different versions of FSB. For example, the FSB on the NAC website is the initial version that had proposed to cover the entire segment of the population. The draft version on the Department of Food and Public Distribution website then proposed coverage to 75% of rural population and 50% of urban population. The PMEAC version proposes at least 75% coverage of the country’s population with 90% of rural coverage and 50% of urban coverage. We have worked out the estimates as per the draft version and our simulations show that the food subsidy estimates under this version are not significantly different from the PMEAC version.

The fiscal viability/cost can be estimated in the following manner:

The FSB for rural areas proposes to provide subsidised (at a fixed price not exceeding R3/kg for rice, R2/kg for wheat and R1/kg for coarse grains) foodgrains (7 kg per person per month) to 75% of the rural population, with at least 46% to the priority rural households and the remainder to the general rural households. It may be noted that the government is yet to specify the criteria for categorisation of population into priority and general households. Let us call it A.

The FSB for urban areas proposes to provide subsidised (at a fixed price not exceeding 50% of the 2010-11 procurement price for rice, wheat and coarse grains) foodgrains (3 kg per person per month) to 50% of the urban population, with at least 28% to the priority urban households and the remainder to the general urban households. Let us call it B.

We also estimated the storage cost for additional food procurement. The storage cost was estimated separately for the (a) 5-7% of foodgrain wastage, (b) creation of additional storage capacity of at least 13 million tonnes across 15 states as estimated by the ministry of food, consumer and public distribution at an average cost of R5,000 per metric tonne and (c) refurbishing existing storage capacity for the remaining foodgrains procured at an average cost of R1,000 per metric tonne. Let us call it C.

As per the ministry of food, consumer and public distribution, there is a leakage of 36% of foodgrains (17% through bogus cards and 19% through fair price shops). We estimated the cost of such leakage separately. It is an irony that such subsidised foodgrains meant for farmers are sold in the open market and possibly bought back by the poor at a higher cost, thereby defeating the entire purpose. Let us call it D.

There is the additional cost of (a) providing free nutritious meals during pregnancy and 6 months thereafter to nursing women and an additional maternity benefit of R1,000 per month, (b) nutritional food to children (with particular emphasis on the malnourished) in the age-group of 6 months till 6 years and (c) mid-day meal to lower and upper primary classes. Let us call it E.

The cost of transporting foodgrains to different ration shops is also estimated separately, as per government estimates. Let us call it F.

Hence the total cost can be estimated as the sum of A+B+C+D+E+F (refer table for details). Our estimate of the FSB assumes a 15% per year increase in MSP. This is based on the observed increase of 15% CAGR between FY06 and FY11. We further assume that the FSB is implemented in full measure in the first year itself. On the basis of these two primary assumptions (other assumptions are listed in the footnote to table) and summing A and B, the minimum cost to the exchequer of implementing the FSB amounts to R80,000 crore in the first year. If we, however, include components C, D, E and F, the total outlay for the FSB will amount to R1,43,000 crore in year 1. This amount is far higher (more than double) than the budgeted food subsidy estimates for the current fiscal at R60,000 crore. Moreover, the incremental estimate of R20,000 crore, which has been put out by the government on the basis of only some incremental costs (namely A & B component), is a gross underestimate. In fact, our estimate is the minimum one and it still is close to R4,57,000 crore in the first 3 years (close to R5,00,000 crore, if we add administrative cost). This is not much different from estimates in the first 3 years that pegs it even higher (R6,00,000 crore made by Ashok Gulati). This apart, we estimate that the total minimum foodgrain requirement for this endeavour will be 61 million tonnes.

Second, there are still a lot of grey areas in the Bill. For example, the draft Bill does not specify for how long the subsidised prices will remain fixed (the NAC version assumes that it will remain unchanged for 10 years), what will be the inflation index, there is no definition of how the general and priority segments of population will be defined, how the destitute will be covered, the cost sharing between the Centre and the states and so on. One provision, which we are sure may be a bone of contention, is that the state governments will be entitled to pay a food security allowance in the event of non-delivery of subsidised foodgrains to designated people. Clearly, such a provision has a double whammy since the Centre will have to procure additional foodgrains and bear subsidy cost because of leakages (as mentioned above) and the state governments may also have to pay an allowance because the food will not be delivered to the beneficiary due to leakages.

Dr Rajiv Kumar is Secretary General, FICCI. Soumya Kanti Ghosh is Director-Economics & Research, FICCI. The views are personal. The authors thank Nibedita Saha for research.